On Thursday I visited the Christchurch office of a fairly prominent finance house. I sat through a presentation about the wealth management services it offers. 

It was a good presentation, in a glib and superficial way. It was well delivered, and came across professionally in tone and material. It had some of my colleagues convinced. 

But me? It made me angry. I spent the presentation trying to disguise my contempt and wondering whether I could walk out without causing a fuss. 

To be clear, nothing about the presentation made me think that a client of this firm is likely to end up in a terrible situation.  

But I don’t think clients of this firm are likely to benefit significantly from engaging this firm. To me, it looked like a wealth distribution scheme masquerading as a wealth management service. 

I would steer my friends and loved ones away from this firm.

Why?

A number of things rose red flags to me. I don’t want to name names. But these are some characteristics that bothered me:

  • The big one for me is that this firm focused on its advisers’ ability to pick investments, and the quality of the firm’s research that informs their decision making.

This conflates financial advice (tailoring strategies to the individual) with investment management (stock picking). These are two very different things. Especially with the latter, you can’t be half pregnant. Even the professionals who focus on investment management struggle to outperform the market. To try to do this while at the same time actively engaging with clients is a losing game.

Admittedly, the presenter spoke highly of buy-and-hold strategies, and alluded to the fact that asset allocation is the most important piece of the puzzle. But the focus of the presentation suggested that he was paying lip service to this key point.

  • It doesn’t help that this business provides broking and investment management services. This creates a significant incentive for unnecessary trading (trading is hazardous to your wealth), and recommending products that are affiliated with the business. Conflicts much? 
  • The business charges substantial fees. Something like 1% of funds under advice, reducing only once assets under advice get to $3 million. That’s really high.

One percent is fine as a starting point, but in my view, fees should be scaled and reduce well before $3 million. Managing $1,200,000 isn’t twice as hard or risky as managing $600,000 and doesn’t justify twice the amount of fees. Likewise, $2,400,000 isn’t twice as hard or risky as $1,200,000.

One of the signs of a good quality adviser is that they are focused on keeping fees low for their client. It’s one of the areas that you can actually control.

While they are professionals and need to be paid, they are conscious of the impact their fees will have. If they care enough, their business model will be aligned with client outcomes. 

  • After the presentation, I asked the presenter a few questions, to get an idea of how he perceived his role as an adviser:
  • I asked whether his firm advises clients in relation to Kiwisaver. No. There wasn’t a commercial incentive.
  • I asked whether his firm advises, even at a strategic level, in relation to insurance, or whether his firm has relationships with any insurance advisers. Insurance wasn’t part of his worldview. 
  • I asked whether his firm is engaged with his clients’ estate planning. No. His assumption was that all of his clients engaged actively with their lawyers had effective succession arrangements in place. 

I don’t think an advice firm need to specialise in these areas. But they should at least be alive to these areas, and be able to point clients in the right direction. 

My general observation about the financial advisory businesses I’ve dealt with in Christchurch is that there are quite a few firms like this. They often have prominent names or are associated with more reputable institutions. They think of themselves more as investment managers than financial advisers.

I don’t think these firms are likely to be putting clients in bad situations. I’ve seen terrible advice and it breaks my heart. This isn’t the case here. 

All else being equal, I would prefer to see someone with significant wealth engaging a firm like this than not have advice at all. These firms will redistribute many of their clients’ benefits into their own pockets, but I would expect these firms to help clients avoid bad outcomes. This is one of the most important things a financial adviser can do.

But these firms, in my view, add limited value to their clients. And I would personally steer my friends and family members away from them.

And lest I discourage anyone reading this from seeking financial advice, there are many firms in Christchurch that appear to provide excellent quality financial advice. In my experience, these top-level advisers represent a much higher proportion of the industry than in Australia. They are usually (but not always) smaller and are unaffiliated with product issuers or brokerage services.

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An aside: The presentation included the standard fare about compliance and how it is somehow a competitive advantage for this firm. Even though all financial advisory businesses are subject to the same rules. News for financial advisers: regulatory requirements aren’t stricter than any other profession, such as practicing law. You’re just not used to them. Talk about compliance if you must, but I’m tired of hearing the same routine.

Sonnie Bailey

Sonnie is an Authorised Financial Adviser (AFA) and former lawyer with experience in the financial services and trustee industries. Sonnie operates Fairhaven Wealth (www.fairhavenwealth.co.nz).